8-K 1 d8k.txt FORM 8-K ================================================================================ SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 8-K Current Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Date of Report (Date of Earliest Event Reported) November 30, 2001 ------------------------------ ARCHSTONE-SMITH OPERATING TRUST -------------------------------------------------------------------------------- (Exact Name of Registrant as Specified in its Charter) Maryland -------------------------------------------------------------------------------- (State or Other Jurisdiction of Incorporation) 0-04254 74-6056896 --------------------------------- -------------------------------------- (Commission File Number) (I.R.S. Employer Identification No.) 7670 South Chester Street, Englewood, CO 80112 ------------------------------------------------------------------------------- (Address of Principal Executive Offices) (Zip Code) (303) 708-5959 -------------------------------------------------------------------------------- (Registrant's Telephone Number, Including Area Code) ================================================================================ Item 5. Other Events On October 31, 2001, Charles E. Smith Residential Realty, Inc. merged with, and into Archstone-Smith Trust ("Archstone-Smith") and Charles E. Smith Residential Realty L.P. (the "Operating Partnership") merged with and into Archstone Communities Trust. The combined company was renamed Archstone-Smith Operating Trust (the "Operating Trust"). See the Form 8-K filed on November 1, 2001 for a more complete discussion of the merger. To aid Operating Trust unit holders and Archstone-Smith shareholders in understanding the results of operations of Smith Residential for the quarter ended September 30, 2001, and to comply with the requirements of the Securities and Exchange Commission, the Operating Trust is filing the Operating Partnership's third quarter financial statements on this Form 8-K. Item 7. Financial Statements, Pro Forma Financial Information and Exhibits (a) Financial Statements of Business Acquired Unaudited Condensed Consolidated Financial Statements of Charles E. Smith Residential Realty L.P. as of September 30, 2001 and for the three-month and nine-month periods ended September 30, 2001 and 2000. (b) Pro Forma Financial Statements None (c) Exhibits 15. Letter of Arthur Andersen LLP regarding unaudited interim financial information SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. ARCHSTONE-SMITH OPERATING TRUST Dated: November 30, 2001 By: William Kell ----------------------------------- Senior Vice President and Controller 2 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To Archstone-Smith Operating Trust (as successor to Charles E. Smith Residential Realty L.P.): We have reviewed the accompanying condensed consolidated balance sheet of Charles E. Smith Residential Realty L.P. (a Delaware limited partnership) and subsidiaries as of September 30, 2001, the related condensed consolidated statements of operations for the three-month and nine-month periods ended September 30, 2001 and 2000, the condensed consolidated statements of partner's equity and other limited partners' interest for the nine months ended September 30, 2001, and the related condensed consolidated statements of cash flows for the nine-month periods ended September 30, 2001 and 2000. These financial statements are the responsibility of the Company's management. We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquires of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our review, we are not aware of any material modifications that should be made to the financial statements referred to above for them to be in conformity with accounting principles generally accepted in the United States. Arthur Andersen LLP November 2, 2001 Vienna, Virginia 3 CHARLES E. SMITH RESIDENTIAL REALTY L.P. CONDENSED CONSOLIDATED BALANCE SHEETS (Dollars in Thousands)
September 30, 2001 December 31, 2000 ------------------ ----------------- (Unaudited) ASSETS Real estate $2,373,595 $2,173,082 Less accumulated depreciation 292,123 261,315 ---------- ---------- 2,081,472 1,911,767 Investment in and advances to unconsolidated Property Service Businesses 116,111 89,244 Investment in unconsolidated properties 55,756 32,397 Other assets 67,045 41,824 ---------- ---------- $2,320,384 $2,075,232 ========== ========== LIABILITIES AND EQUITY Liabilities Unsecured credit facilities $ 150,000 $ 32,000 Mortgages payable 1,237,168 1,191,704 Accounts payable and accrued expenses 52,480 47,387 Other liabilities 9,617 8,807 ---------- ---------- Total liabilities 1,449,265 1,279,898 ---------- ---------- Commitments and contingencies Other Limited Partners' Interest Preferred units, at liquidation value - 45,000 Common units - 12,936,859 and 13,503,732 units issued and outstanding at September 30, 2001 and December 31, 2000, respectively, at redemption value 666,248 634,675 ---------- ---------- 666,248 679,675 ---------- ---------- Partner's Equity Preferred units, at liquidation value 196,500 251,500 Common units - 26,606,665 and 21,916,759 units issued and outstanding at September 30, 2001 and December 31, 2000, respectively 8,371 (135,841) ---------- ---------- Total partner's equity 204,871 115,659 ---------- ---------- $2,320,384 $2,075,232 ========== ==========
The accompanying notes are an integral part of these condensed consolidated statements. 4 CHARLES E. SMITH RESIDENTIAL REALTY L.P. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Dollars in Thousands, Except Per Unit Data) (Unaudited)
For the Three Months For the Nine Months Ended September 30, Ended September 30, ------------------------ --------------------- 2001 2000 2001 2000 --------- -------- --------- -------- Revenues: Rental revenues $ 107,687 $ 98,742 $ 315,435 $282,312 Other income 8,361 3,452 25,615 7,076 --------- -------- --------- -------- 116,048 102,194 341,050 289,388 --------- -------- --------- -------- Expenses: Rental expenses (31,820) (30,058) (94,610) (85,039) Real estate taxes (8,682) (8,896) (26,842) (24,498) Depreciation and amortization (13,120) (11,531) (38,520) (32,993) Interest expense (22,518) (19,306) (67,007) (57,291) General and administrative expenses (2,849) (2,810) (9,984) (8,507) Other expenses (4,029) - (15,276) - --------- -------- --------- -------- (83,018) (72,601) (252,239) (208,328) --------- -------- --------- -------- Earnings from operations 33,030 29,593 88,811 81,060 Gain on sales 31,847 - 31,847 4,161 --------- -------- --------- -------- Earnings before extraordinary item 64,877 29,593 120,658 85,221 Extraordinary item - loss on extinguishment of debt (385) - (385) - --------- -------- --------- -------- Net income 64,492 29,593 120,273 85,221 Less: Income attributable to preferred units (3,854) (5,925) (14,383) (17,776) --------- -------- --------- -------- Net income attributable to common units $ 60,638 $ 23,668 $ 105,890 $ 67,445 ========= ======== ========= ======== Weighted average common units outstanding - Basic 38,712 35,176 36,824 34,859 --------- -------- --------- -------- Weighted average common units outstanding - Diluted 44,419 38,587 43,935 38,025 --------- -------- --------- -------- Earnings per common unit - basic Income before extraordinary item $ 1.58 $ 0.67 $ 2.89 $ 1.93 Extraordinary item (0.01) - (0.01) - --------- -------- --------- -------- Net income $ 1.57 $ 0.67 $ 2.88 $ 1.93 ========= ======== ========= ======== Earnings per common unit - diluted Income before extraordinary item $ 1.44 $ 0.65 $ 2.68 $ 1.89 Extraordinary item (0.01) - (0.01) - --------- -------- --------- -------- Net income $ 1.43 $ 0.65 $ 2.67 $ 1.89 ========= ======== ========= ========
The accompanying notes are an integral part of these condensed consolidated statements. 5 CHARLES E. SMITH RESIDENTIAL REALTY L.P. CONDENSED CONSOLIDATED STATEMENTS OF PARTNER'S EQUITY AND OTHER LIMITED PARTNERS' INTEREST (Dollars in Thousands)
General Partner's General and Other Limited Limited Interest Partners' Interest ----------------------------- --------------------------- Series H Preferred Common Common Preferred Units Units Units Units ---------- ---------- --------- ----------- Balance, January 1, 2001 251,500 (135,841) 634,675 45,000 Conversion of preferred units to common units (55,000) 55,000 45,000 (45,000) Amortization of grants - - 1,227 - Net income - 80,205 40,068 - Contribution by Charles E. Smith Residential Realty, Inc. - 6,325 - - Distributions - (55,740) (23,243) - Exercise of options - 26,984 - - Other - (41) - - Adjustment to reflect Other Limited Partners' Interest at redemption value - 31,479 (31,479) - ----------- ---------- ---------- ----------- Balance, September 30, 2001 (unaudited) $ 196,500 $ 8,371 $ 666,248 $ - ========== ========== ========== =========== Units issued and outstanding at September 30, 2001 4,633,449 26,206,665 12,936,859 - ========== ========== ========== =========== Units issued and outstanding at December 31, 2000 6,833,449 21,916,759 13,503,732 1,800,000 ========== ========== ========== ===========
The accompanying notes are an integral part of these condensed consolidated statements. 6 CHARLES E. SMITH RESIDENTIAL REALTY L.P. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in Thousands) (Unaudited)
For the Nine Months Ended September 30, ------------------------------------------- 2001 2000 ----------- ----------- CASH FLOWS FROM OPERATING ACTIVITIES $ 114,332 $ 133,472 CASH FLOWS FROM INVESTING ACTIVITIES: Acquisitions and development of rental property (72,738) (146,695) Additions to rental property (102,745) (42,633) Increase in investment in and advances to unconsolidated Property Service Businesses (26,867) (32,467) Increase in investment in unconsolidated properties (23,450) (9,921) Acquisition deposits and other (5,212) (4,160) ----------- ----------- Net cash used in investing activities (231,012) (235,876) ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Increase in deferred charges (1,069) (2,986) Proceeds from issuance of common units, net 33,309 21,638 Mortgage loans, net (12,723) 211,034 Lines of credit and notes payable, net 157,000 (66,000) Construction loans, net 19,187 (3,631) Dividends and distributions - Common (64,600) (57,484) Dividends and distributions - Preferred (14,383) (17,632) Other, net (41) 6,908 ----------- ----------- Net cash provided by financing activities 116,680 91,847 ----------- ----------- NET DECREASE IN CASH AND CASH EQUIVALENTS - (10,557) CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD - 10,577 ----------- ----------- CASH AND CASH EQUIVALENTS, END OF PERIOD $ - $ - =========== =========== SUPPLEMENTAL INFORMATION: Cash paid during the period for interest $ 70,275 $ 59,577 Capitalized interest 4,073 3,518 Purchase of property in exchange for Operating Partnership units - 1,270 Purchase of property in exchange for assumption of debt - 10,233 Proceeds from sale of rental property held in escrow 35,097 40,997 Purchase of property with escrow proceeds 35,097 49,124
The accompanying notes are an integral part of these condensed consolidated statements. 7 CHARLES E. SMITH RESIDENTIAL REALTY L.P. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1. ORGANIZATION AND BASIS OF PRESENTATION The accompanying interim financial statements include all of the accounts of Charles E. Smith Residential Realty L.P. (the "Operating Partnership") and its subsidiary financing partnerships, and Smith Realty Company ("SRC"). (As used herein, the term "Company" may be used to mean Charles E. Smith Residential Realty L.P., or its sole general partner, Charles E. Smith Residential Realty, Inc. ("Smith Residential"), or both, unless the context indicates otherwise.) In 2001, the Company purchased all of the voting stock of SRC, and as a result, begin consolidating the financial results of SRC. All significant intercompany balances and transactions have been eliminated in consolidation. The financial information furnished is unaudited, and in management's opinion, includes all adjustments (consisting only of normal, recurring adjustments), that are necessary for a fair presentation of financial position as of September 30, 2001 and the results of operations for the interim periods ended September 30, 2001 and 2000. Such interim results are not necessarily indicative of the operating results for a full year. The accompanying financial statements should be read in conjunction with the audited financial statements and related footnotes appearing in the Company's Annual Report on Form 10-K. The Operating Partnership is engaged in the ownership, operation, management, leasing, acquisition, and development of real estate properties, primarily residential multifamily properties. As of September 30, 2001, the Operating Partnership owned 59 operating multifamily properties containing 27,038 apartment units, had 480 units under construction at one owned site and had 226 units under construction at one site for which the Company owned substantially all of the economic interest. The Operating Partnership also had interests in four operating multifamily properties totaling 1,724 apartment units and in one property under construction totaling 630 units. In addition, the Operating Partnership owned one freestanding retail shopping center aggregating 205,000 square feet. The Company's properties are located in the Washington, D.C., Chicago, Boston and Southeast Florida metropolitan areas. In May 2001, the Company announced plans to merge with Archstone Communities Trust ("Archstone"). The merger was completed on October 31, 2001 and was structured as a tax-free transaction. The combined company will operate under the name Archstone-Smith and will use the Smith Residential brand name for its high-rise and urban apartment portfolio and the Archstone brand name for the garden style communities. (See note 10) Reclassifications Certain 2000 amounts have been reclassified to conform to the 2001 presentation. Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect amounts reported in the financial statements and the related notes. Actual results could differ from those estimates. Estimates and assumptions are reviewed periodically and the effects of revisions are reflected in the period they are determined to be necessary. 2. NEW ACCOUNTING PRONOUNCEMENTS Recently Issued Accounting Pronouncements In June 2001 the Financial Accounting Standards Board "FASB" issued SFAS No. 141, "Business Combinations" (effective July 1, 2001) and SFAS No 142, "Goodwill and Other Intangible Assets" (effective for goodwill acquired in business combinations entered into after July 1, 2001). SFAS No. 141 requires the use of purchase accounting for all business combinations entered into after June 30, 2001. SFAS No. 142 specifies that goodwill and some intangible assets will no longer be amortized but instead will be subject to periodic impairment testing. The Company is in the process of evaluating the financial statement impact of adoption of SFAS No. 142. In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations." SFAS No. 143 addresses financial accounting and reporting obligations associated with the retirement of tangible long-lived assets and for the associated retirement costs. SFAS No. 143 is required to be adopted on January 1, 2003. We do not anticipate the adoption of SFAS No. 143 will have a material impact on our financial position, results of operations or cash flows. In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS No. 144 supersedes and amends SFAS No. 121 and relevant portions of APB Opinion No. 30. SFAS No. 144 is required to be adopted on January 1, 2002. We do not anticipate that the adoption of SFAS No. 144 will have a material impact on our financial position, results of operations or cash flows. In July 2001, the Emerging Issues Task Force ("EITF") issued topic D-98 ("Topic D-98"), "Classification and Measurement of Redeemable Securities." Topic D-98 provides clarification regarding the redemption criteria on redeemable securities and provides additional guidance on when such redemption criteria are not within the control of the issuer. Topic D-98 is required to be retroactively adopted on December 31, 2001. The Company is currently evaluating the impact that adoption of Topic D-98 will have on the Company's financial position, results of operations and cash flows. 8 3. ACQUISITIONS AND DISPOSITIONS In September 2001, the Company acquired Ballston Place, a newly developed 383-unit high-rise property, located in Ballston, Virginia. The $53.0 million cash transaction was funded with proceeds from the tax deferred sale of Concord Village for $35.1 million and a $17.9 million draw on the Company's line of credit. The Company recognized a gain on the sale of $31.8 million. 4. DEBT In February 2001, the Company closed on two unsecured credit facilities totaling $150 million from bank groups led by PNC Bank, N.A., as administrative agent, which refinanced existing credit facilities scheduled to mature in March 2001. Draws upon the new lines are subject to certain unencumbered asset requirements and bear interest based on London Interbank Offer Rate (LIBOR) plus an applicable margin of 85 to 125 basis points based on the leverage ratio of the Company. If the Company chooses to and obtains an investment grade rating the applicable margin will be between 62.5 and 100 basis points over LIBOR based on such rating. The Company also pays a quarterly fee ranging from 0.125% to 0.20% on the full amount available under the lines of credit, depending upon the applicable leverage ratio or investment rating. The line of credit agreements contain certain restrictive covenants, including maintenance of minimum equity value, debt to equity ratios and debt service coverage requirements. The Company's credit facilities were repaid and terminated in November 2001 (See Note 10). In March 2001, the Company closed on two second mortgage loans totaling $31.1 million. The $23.4 million loan has a fixed interest rate of 6.795% and is collateralized by Crystal Towers. The $7.7 million loan has a fixed interest rate of 6.62% and is collateralized by 2000 Commonwealth. The loans require monthly payments of interest only and mature coterminous with their respective first mortgages in January 2006 and January 2007, respectively. In March 2001, the Company refinanced an existing $12.3 million mortgage loan on The Consulate with a $27.0 million mortgage loan. The new loan has a fixed interest rate of 6.7% and requires monthly payments of interest only through March 2011, at which time principal amortization begins using a 30-year amortization schedule with a balloon payment due March 2012. In July 2001, the $33.6 million Mirador mortgage matured. The loan was paid off through a draw on the Company's line of credit. In addition, the Company repaid the $11.8 million Bennington mortgage and the $32.0 million Stonegate mortgage through draws on its lines of credit. The Company paid prepayment penalties totaling $0.4 million. As a result of the proposed merger with Archstone Communities, the Operating Partnership obtained a $100 million loan from Archstone in order to avoid encumbering additional assets and to avoid incurring third party financing fees. Proceeds were used to pay down the Company's lines of credit. The Company repaid the note to Archstone prior to completion of the merger (See Note 10). 9 5. INVESTMENT IN AND ADVANCES TO UNCONSOLIDATED PROPERTY SERVICE BUSINESSES In January 2001, the Company and the Property Service Businesses ("PSB") elected to treat each PSB as a taxable REIT subsidiary. In addition, the Company began consolidating the financial results of SRC in 2001 due to the Company's acquisition of all of the voting stock of SRC. Prior to 2001, SRC was accounted for using the equity method of accounting. This had no impact to net income but simply changed the financial statement presentation of SRC's results. In February 2001, Consolidated Engineering Services, Inc. ("CES") acquired Commonwealth Air Conditioning and Heating, Inc., one of the largest independent service contractors in the metropolitan Boston, Massachusetts area. The purchase price of $19.1 million consisted of 100,310 shares of common stock (purchased by CES from the Company) and cash. CES funded the transaction through the Operating Partnership in exchange for a promissory note. In March 2001, CES closed on a twelve-month $50 million line of credit with PNC Bank and Commerzbank replacing an expiring facility. The line is guaranteed by the Operating Partnership and bears interest based on LIBOR plus an applicable margin of 75 to 115 basis points based on the leverage ratio of the Company. The current borrowing rate is LIBOR plus 100 basis points. CES also pays a quarterly fee of 10 basis points on the full amount available under the line. In May 2001, CES acquired Trimech Corporation of Pompton Plains, New Jersey. The purchase price of $3.2 million consisted of 37,232 shares of common stock (purchased by CES from the Company) and cash. CES funded the transaction through the Operating Partnership in exchange for a promissory note. 6. INVESTMENT IN UNCONSOLIDATED PROPERTIES In February 2001, the Company entered into and funded a $23.8 million participating loan collateralized by Plaza 440, a 457-unit luxury high-rise property in downtown Chicago. The loan, which matures September 1, 2009, provides the Company with a 90% participation in the property cash flow after debt service if certain minimum property performance thresholds are met. Otherwise, the Company will earn a fixed interest rate of 7%. The loan is subordinate to a first mortgage of $63 million at 7%. After two years, the loan agreement provides the Company the option to convert its loan to an ownership interest. Simultaneous with the loan transaction, SRC entered into a multi-year property management agreement with the owner. The Company has accounted for this investment as an ADC arrangement in accordance with AICPA Practice Bulletin No. 1. 10 7. PREFERRED EQUITY On June 29, 2001, 3,600,000 Series H Cumulative Convertible Redeemable Preferred Units ("Series H Preferred Units") were converted into 2,337,662 common units. On September 19, 2001, 400,000 Series H Preferred Units were converted into 259,740 common units. The following table sets forth the Operating Partnership's issued and outstanding preferred units:
September 30, December 31, 2001 2000 ------------- ------------ (in thousands) Series A Cumulative Convertible Redeemable Preferred Units, $0.01 par value; 2,640,325 units authorized; liquidation preference of $27.08; 2,640,325 units issued and outstanding at September 30, 2001 and December 31, 2000, respectively $ 71,500 $ 71,500 Series C Cumulative Redeemable Preferred Units, $0.01 par value; 500 units authorized; liquidation preference of $100,000; 500 units issued and outstanding at September 30, 2001 and December 31, 2000, respectively 50,000 50,000 Series E Cumulative Convertible Redeemable Preferred Units, $0.01 par value; 684,931 units authorized; liquidation preference of $36.50; 684,931 units issued and outstanding at September 30, 2001 and December 31, 2000, respectively 25,000 25,000 Series F Cumulative Convertible Redeemable Preferred Units, $0.01 par value; 666,667 units authorized; liquidation preference of $37.50; 666,667 units issued and outstanding at September 30, 2001 and December 31, 2000, respectively 25,000 25,000 Series G Cumulative Convertible Redeemable Preferred Units, $0.01 par value; 641,026 units authorized; liquidation preference of $39.00; 641,026 units issued and outstanding at September 30, 2001 and December 31, 2000, respectively 25,000 25,000 Series H Cumulative Convertible Redeemable Preferred Units, $0.01 par value; 4,040,404 units authorized; liquidation preference of $25.00; 4,000,000 units issued and outstanding at December 31, 2000 - 100,000 ----------- ----------- $ 196,500 $ 296,500 =========== ===========
11 8. PER UNIT DATA Earnings per common unit of the Company for the three and nine months ended September 30, 2001 and 2000 is computed based on weighted average common units outstanding during the period as follows (in millions):
Three Months Ended September 30, ----------------------------------------------------- 2001 2000 ----------------------- ------------------------ Basic Diluted Basic Diluted ----- ------- ----- ------- Weighted Average Common Operating Partnership Units and equivalents 38.7 44.4 35.2 38.6 Nine Months Ended September 30, ----------------------------------------------------- 2001 2000 ----------------------- ------------------------ Basic Diluted Basic Diluted ----- ------- ----- ------- Weighted Average Common Operating Partnership Units and equivalents 36.8 43.9 34.9 38.0
Operating Partnership units not held by Smith Residential may be redeemed at the unitholders' sole discretion. Such redemption may be made for cash at the then fair value of Smith Residential's common stock, or, at the option of Smith Residential, for shares of Smith Residential common stock on a one-for-one basis. A total of 0.6 million Operating Partnership units were redeemed for shares of common stock during the nine months ended September 30, 2001. 12 A reconciliation of income (before extraordinary item) and units used to calculate basic and diluted earnings per common unit for the three and nine months ended September 30, 2001 and 2000 follows:
Weighted Per Unit Income Average Units Amount --------------- -------------- -------- (In Thousands) (In Thousands) Three Months Ended September 30, 2001: -------------------------------------- Income before extraordinary item $ 64,877 Income attributable to Preferred Units (3,854) ----------- Earnings per common unit - Basic Income attributable to common unitholders before extraordinary item 61,023 38,712 $ 1.58 Effect of dilutive securities: Preferred Units - Series A, E, F, G, H 2,897 4,862 (0.11) Options - 845 (0.03) ----------- -------- ------- Earnings per common unit - Diluted $ 63,920 44,419 $ 1.44 =========== ======== ======= Nine Months Ended September 30, 2001: ------------------------------------- Income before extraordinary item $ 120,658 Income attributable to Preferred Units (14,383) ----------- Earnings per common unit - Basic Income attributable to common unitholders before extraordinary item 106,275 36,824 $ 2.89 Effect of dilutive securities: Preferred Units - Series A, E, F, G, H 11,483 6,416 (0.17) Options - 695 (0.04) ----------- -------- ------- Earnings per common unit - Diluted $ 117,758 43,935 $ 2.68 =========== ======== ======= Three Months Ended September 30, 2000: -------------------------------------- Income $ 29,593 Income attributable to Preferred Units (5,925) ----------- Earnings per common unit - Basic Income attributable to common unitholders 23,668 35,176 $ 0.67 Effect of dilutive securities: Preferred Units - Series A 1,452 2,640 (0.01) Options - 771 (0.01) ----------- -------- ------- Earnings per common unit - Diluted $ 25,120 38,587 $ 0.65 =========== ======== ======= Nine Months Ended September 30, 2000: ------------------------------------- Income $ 85,221 Income attributable to Preferred Units (17,776) ----------- Earnings per common unit - Basic Income attributable to common unitholders 67,445 34,859 $ 1.93 Effect of dilutive securities: Preferred Units - Series A 4,357 2,640 (0.02) Options - 526 (0.02) ----------- -------- ------- Earnings per common unit - Diluted $ 71,802 38,025 $ 1.89 =========== ======== =======
13 9. SEGMENT REPORTING Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by senior management in deciding how to allocate resources and in assessing performance. Property Segments The Company's primary business is the ownership and operation of multifamily residential real estate. As such, the residential rental properties constitute the four primary operating segments -- Core, Acquisition/Disposition, Redevelopment and Development portfolios -- depending upon the maturity and nature of each property. Core consists of multifamily properties, other than Redevelopment or Development, which have been owned more than one full calendar year. Therefore, the 2001 Core represents properties owned as of December 31, 1999. Acquisition/Disposition consists of purchased properties which have not yet reflected one full calendar year of operations and disposed properties. Redevelopment includes purchased properties in which the Company is making significant renovations to reposition the property in the market place. Properties will remain in the Redevelopment Portfolio until one full calendar year of operating results is reflected subsequent to completion of the renovations. Development consists of properties which the Company has constructed or is in the process of constructing which have not yet had a full calendar year of stabilized operating results. On the first of January each year, Acquisition, Redevelopment and Development properties that meet the one-year requirement are transferred to the Core portfolio. The Company's fifth property segment is the Retail portfolio, which reflects results for the one free standing retail property. The Company evaluates performance for the Property Segments based on Net Operating Income ("NOI") which is the difference between Rental Revenue and Operating Expenses (which primarily excludes interest expense, general and administrative costs and depreciation). Property Service Business Segment The Company also evaluates the separate financial information of the Property Service Businesses. These businesses provide professional services such as property management, furnished corporate apartment rentals, engineering and technical consulting, and construction management to both Company-owned properties and properties owned by third parties. Given the similarities in the nature of services, customers and distribution methods, the Company considers the Property Service Businesses to be one segment. The Company evaluates performance for the Property Service Business segment, which includes both consolidated and unconsolidated entities, based on Funds from Operations ("FFO"), which is defined using the revised definition adopted by the National Association of Real Estate Investment Trusts ("NAREIT") as net income (loss) (computed in accordance with generally accepted accounting principles) excluding gains (or losses) from debt restructuring and sale of property, plus depreciation/amortization of assets unique to the real estate 14 industry. Depreciation/amortization of assets not unique to the industry, such as amortization of deferred financing costs, goodwill and non-real estate assets, is not added back. The accounting policies for all segments are the same as those described in the summary of significant accounting policies in the Company's Annual Report on Form 10-K. 15 Information concerning operations by segment for the three and nine months ended September 30, 2001 and 2000 were as follows (in thousands): Property Segments
Three Months Ended Nine Months ended September 30, September 30, --------------------------- ---------------------------- 2001 2000 2001 2000 ----------- --------- ----------- ----------- Net Operating Income -------------------- Core Portfolio $ 44,518 $ 39,882 $ 127,704 $ 117,114 Acquisition/Disposition Portfolio 3,962 4,376 11,606 11,967 Redevelopment Portfolio 14,628 11,928 43,178 35,003 Development Portfolio 3,918 3,231 11,032 7,555 Retail Portfolio 159 371 463 1,136 Other 4,729 3,414 13,447 6,894 ----------- --------- ----------- ---------- Consolidated Total 71,914 63,202 207,430 179,669 Depreciation and amortization (13,120) (11,531) (38,520) (32,993) Corporate General and Administrative Expenses (2,849) (2,810) (9,984) (8,507) Net interest expense (22,074) (19,268) (66,373) (57,109) Gain on sale 31,847 - 31,847 4,161 Merger related costs (841) - (3,742) - Extraordinary item - Loss on Extinguishment of Debt (385) - (385) - ----------- --------- ----------- ---------- Net income $ 64,492 $ 29,593 $ 120,273 $ 85,221 =========== ========= =========== ========== Revenues -------- Core Portfolio $ 69,076 $ 64,916 $ 201,920 $ 188,276 Acquisition/Disposition Portfolio 6,355 7,085 18,809 19,568 Redevelopment Portfolio 25,355 20,110 74,909 58,605 Development Portfolio 6,298 5,895 17,981 13,610 Retail Portfolio 603 736 1,816 2,253 ----------- --------- ----------- ---------- Consolidated total 107,687 98,742 315,435 282,312 Other 8,361 3,452 25,615 7,076 ----------- --------- ----------- ---------- Total revenue $ 116,048 $ 102,194 $ 341,050 $ 289,388 =========== ========= =========== ========== Real Estate Assets, gross ------------------------- Core Portfolio $ 1,258,545 $1,209,792 Acquisition/Disposition Portfolio 189,788 99,265 Redevelopment Portfolio 656,381 459,042 Development Portfolio 253,598 203,510 Retail Portfolio 15,283 15,148 ----------- ---------- Sub-total 2,373,595 1,986,757 Accumulated depreciation (292,123) (262,189) ----------- ---------- Consolidated Total, Net $ 2,081,472 $1,724,568 =========== ==========
16 Property Service Business Segment
Three Months Ended Nine Months Ended September 30, September 30, --------------------------- ----------------------------- 2001 2000 2001 2000 ----------- --------- ------------ ------- Funds from Operations $ 3,273 $ 2,918 $ 9,501 5,288 Revenues 111,742 74,971 313,618 182,897 Depreciation /Amortization 2,580 1,486 7,718 4,326
10. SUBSEQUENT EVENTS In October 2001, CES acquired Viox Services, Inc. ("Viox") of Cincinnati, Ohio. Viox provides facility management services in Kentucky, Indiana and Ohio. The purchase price of $10.0 million consisted of 87,057 shares of Smith Residential common stock (purchased by CES from the Company) and cash. CES funded the transaction through the Operating Partnership in exchange for a promissory note. On October 26, 2001, the $100 million note extended to the Operating Partnership on July 27, 2001 by Archstone was repaid in full, along with all accrued interest due. In October 2001, the Company completed its previously announced merger with Archstone, as follows: . On October 31, 2001, the Operating Partnership merged with and into Archstone and the combined company was renamed Archstone-Smith Operating Trust (the "Operating Trust"). In consideration of the merger, the Operating Partnership unitholders received 1.975 Operating Trust common units in exchange for one Operating Partnership common unit and holders of Smith Partnership preferred units received preferred units of the Operating Trust with preferences, conversion and other rights, voting powers, restrictions, limitations as to dividends, qualifications and terms or conditions of redemption identical to the corresponding series of Operating Partnership preferred units for which they were converted, except for changes that do not materially and adversely affect the former holders of the Operating Partnership preferred units. . On October 31, 2001, the Company's sole general partner, Smith Residential, merged with and into Archstone-Smith Trust ("Archstone-Smith"). In consideration of the merger, stockholders of Smith Residential received, in exchange for one share of Smith Residential common stock, 1.975 Archstone-Smith common shares. Holders of Smith Residential preferred stock received preferred shares of Archstone-Smith with preferences, conversion and other rights, voting powers, restrictions, limitations as to dividends, qualifications and terms or conditions of redemption identical to the corresponding series of Smith Residental preferred stock for which they were converted, except for changes that do not materially and adversely affect the former holders of the Smith Residential preferred stock. On October 31, 2001, the Company repaid the $5.8 million mortgage on Park Lincoln through a draw on its line of credit. On November 1, 2001, Archstone-Smith paid off approximately $220 million in Smith Partnership and CES credit facilities and terminated all of its unsecured credit facilities. 17